Strategic Supply Chain Management

Chapter - 7
Coordination
in the Supply Chain

Chapter # 7 Outline

Strategic Supply Chain

Management

Lack of Supply Chain Coordination and the

Bullwhip Effect

Effect of Lack of Coordination on Performance

Obstacles to Coordination in the Supply Chain

Managerial Levers to Achieve Coordination

Achieving Coordination in Practice
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Lack of SC Coordination and the

Bullwhip Effect
Supply chain coordination when all stages in the supply chain take
actions together (usually results in greater total supply chain profits)

SC coordination requires each stage of the supply chain to share

information take into account the impact its actions have on other stages.

Lack of coordination results when:

Objectives of different stages conflict or
Information moving between stages is delayed or distorted

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Bullwhip Effect
Fluctuations in orders increase as they move up the supply chain
from retailers to wholesalers to manufacturers to suppliers.

Distorts demand information within the supply chain, where different

stages have very different estimates of what demand looks like
Results in a loss of supply chain coordination
Examples: Proctor & Gamble (Pampers); -Orders for raw materials
were highly variable, although consumption was stable.

Barilla pasta weekly orders varies with a factor of 70 where as

weekly sales varies with a factor less than 3.

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The Effect of Lack of

Coordination on Performance
Manufacturing cost due to Bull whip effect increases variability
which can be addressed by either building excess capacity or holding
excess inventory so both increases cost.
Inventory cost to handle increased variability in demand increases
cost
Replenishment lead time lack of coordination increases
replenishment lead time in supply chain
Transportation cost due to bull whip effect transportation
requirements fluctuate significantly which raises transportation cost.
Labor cost for shipping and receiving (increases)
Level of product availability (decreases)
Relationships across the supply chain (worsens)
Ultimately Profitability (decreases)
The bullwhip effect reduces supply chain profitability by making it
more expensive to provide a given level of product availability.

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Obstacles to Coordination
in a Supply Chain
Incentive Obstacles
Information Processing Obstacles
Operational Obstacles
Pricing Obstacles
Behavioral Obstacles

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Incentive Obstacles

The sales typically measured by a manufacturer are

quantity sold to distributors or retailers (sell in), not the
quantity sold to final customers (sell-through). Measuring
performance based on sell in is often justified on the
grounds that the manufacture's sales force does not
control sell-through.

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Information Processing Obstacles

When demand information is distorted as it moves
between different stages of the supply chain, leading to
increased variability in orders within the supply chain.

Any variability in demand is magnified as orders move up

the supply chain to manufacturers and suppliers. In SC
where the fundamental means of communication among
different stages are the orders that are placed,
information is distorted as it moves up the supply chain.

The lack of information sharing between stages of SC

magnifies the information distortion.

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Operational Obstacles

It occurs when actions taken in the course of placing and filling orders that
lead to an increase in variability

Ordering in large lots (much larger than usual demand) variability increases in
the SC.

A manufacturer supplying several retailers that batch their orders faces an

order stream that is much more variable than the demand the retailers
experience.

Large replenishment lead times information distortion is magnified if

replenishment lead times between stages are long.

Rationing and shortage gaming (common in the computer industry because

of periodic cycles of component shortages and surpluses)

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Pricing Obstacles
When pricing policies for a product lead to an increase in
variability of orders placed
Lot-size based quantity discounts create bull whip effect.
Price fluctuations- retailer purchase large lots during the
discounting period to cover demand for future periods
resulting in forward buying.

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Behavioral Obstacles
Problems in learning, often related to communication in the
supply chain and how the supply chain is structured
Each stage of the supply chain views its actions locally and
is unable to see the impact of its actions on other stages
Different stages react to the current local situation rather
than trying to identify the root causes
Based on local analysis, different stages blame each other
for the fluctuations, with successive stages becoming
enemies rather than partners
No stage learns from its actions over time because the most
significant consequences of the actions of any one stage
occur elsewhere, resulting in a vicious cycle of actions and
blame
Lack of trust results in opportunism, duplication of effort, and
lack of information sharing
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Managerial Levers to
Achieve Coordination

Aligning Goals and Incentives

Improving Information Accuracy
Improving Operational Performance
Designing Pricing Strategies to Stabilize Orders
Building Strategic Partnerships and Trust

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Aligning Goals and Incentives

Align incentives so that each participant has an incentive
to do the things that will maximize total supply chain
profits
Align incentives across functions- One key to coordination
decisions within a firm is to ensure that the objective any function uses to
evaluate a decision is aligned with the firms overall objective.

Pricing for coordination-

A manufacture use lot size-based quantity

discounts to achieve coordination for commodity products if the manufacturer
has large fixed costs associated with each lot. Ex - volume discounts,
revenue sharing etc.

Alter sales force incentives from sell-in (to the retailer) to

sell-through (by the retailer to customers)-Managers should link
incentives for the sales staff to sell through by retailer rather than sell-in to
the retailer. It eliminates any motivation the sales staff may have for forward
buying. elimination of forward buying helps reduce fluctuations in the
orderstream.

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Improving Information visibility & Accuracy

Sharing point of sale data if retailers share POS data with other supply
chain stages, all supply chain stages can forecast future demand based on customer
demand. Sharing of POS helps reduce information distortion. Ex- wallmart, Dell.

Collaborative forecasting and planning -

Once Pos data shared,

different stages of the supply chain must forecast and plan jointly if complete
coordination is to be achieved. Manufacturer must be aware of the retailers promotion
plan for better coordination.

Single stage control of replenishment -

when a single stage

controls replenishment decisions for the entire chain, the problem of multiple forecasts
is eliminated and coordination within the supply chain follows. Several industry
practices Continuous replenishment programs (CRP), Vendor managed inventory
(VMI).

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Improving Operational Performance

Reducing replenishment lead time

Reduces uncertainty in demand.

EDI is useful and can cut the lead time associated with order placement and
information transfer.
Reducing lot sizes a reduction of lot sizes decreases the amount of fluctuation
that can accumulate between any pair of stages of a supply chain thus decreasing
distortion.
Computer-assisted ordering (CAO) & EDI helps reduce the fixed cost.
The gap in the prices of truckload (TL) and less than truckload (LTL) shipping
encourages shipment in TL quantities.
Technology and other methods to simplify receiving process. Such as (RFID) radio
frequency identification.
Changing customer ordering behavior for a particular day of a week.

Rationing based on past sales and sharing information to limit gaming

- to diminish information distortion, mangers can design rationing schemes that
discourages retailers from artificially inflating their orders in the case of shortage, one
approach referred to as Turn-and-earn, is to allocate the available supply based on
past retailer sales rather than current retailer orders.
Information sharing across supply chain to minimize shortage situations.

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Designing Pricing Strategies

to Stabilize Orders
Moving from Lot size based to volume based quantity discounts
Encouraging retailers to order in smaller lots/ stable lot sizes and reduce forward
buying.
Moving from lot size-based to volume-based quantity discounts (consider total
purchases over a specified time period).

Stabilizing pricing
Eliminate promotions and charging everyday low pricing, EDLP removes forward
buying.
Limit quantity purchased during a promotion to decrease forward buying.
Tie promotion payments paid to the retailer to the amount of sell-through rather than
amount purchased by the retailer.

Building strategic partnerships and trust

easier to implement these approaches if there is trust within supply chain.

- Sharing of accurate information that is trusted by every stage results in a better

matching of supply chain demand throughout the supply chain and a lower cost.

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Continuous Replenishment and

Vendor Managed Inventories.

A single point of replenishment decisions ensures visibility and a common

forecast that drives orders across the supply chain.

CRP (Continuous replenishment programs) & VMI (Vendor

managed Inventory
CRP
Wholesaler or manufacturer replenishes a retailer based on POS data.
CRP may be supplier, distributor or third party managed.
CRP systems are driven by actual withdrawals of inventory from retailer
warehouses.
In CRP, inventory at the retailer is owned by the retailer.
IT systems linked across the SC provide a good information infrastructure
on which CRP may be based.

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Continuous replenishment and

vendor managed inventories.
VMI (Vendor managed Inventory
Manufacturer or supplier is responsible for product inventory decisions at the retailer.
as a result control of the replenishment decision moves to manufacturer instead of
retailer.
In many instances of VMI, the inventory is owned by the supplier untill it is sold by
the retailer.
VMI requires the retailers to share demand information with the manufacturer to allow
it to make inventory decisions.
VMI helps to convey customer data to manufacturer, which can be produced
accordingly with improved forecasts and better match with customer demand.
VMI can allow manufacturer to increase its profits as well as profits for the entire SC
if both retailer and manufacturer margins are considered when making inventory
decision.

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Collaborative Planning, Forecasting

and Replenishment (CPFR)

Voluntary inter-industry commerce standards (VICS)

has defined CPFR

as a business practice that combines the intelligence of multiple partners in the

planning and fulfillment of customer demand.

According to VICS, since 1998, over 300 companies have implemented the
process.

It is important to understand successful CPFR can be built only on a foundation in

which the two parties have synchronized their data and established standards for
exchanging information that.

1.
2.
3.
4.

Sellers and buyers in a supply chain may collaborate along any or all of the
following four supply chain activities.
Strategy and planning
Demand and supply management
Execution
Analysis

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Collaborative Planning, Forecasting

and Replenishment (CPFR)
1.

Sellers and buyers in a supply chain may collaborate along any or all of the
following four supply chain activities.
Strategy and planning - The partners determine the scope of the collaboration
and assign roles, responsibilities, and clear check points. In a joint business plan, they
identify significant events such as promotions, new product introductions, store
openings/closings and changes in inventory policies that affect demand and supply.

2.

Demand and supply management - A collaborative sales forecast projects

best estimate of consumer demand at the point of sale. This is then converted to a
collaborative order plan that determines future orders and delivery requirements
based on sales forecasts, inventory positions, and replenishment lead times

3.

Execution once the forecast is firm then it is converted to actual order. It

involves production, shipping, receiving, stocking of products.

4.

Analysis - The key analysis tasks focus on identifying exceptions and evaluating
metrics that used to assess performance or identify trends.

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Achieving Coordination in Practice

Quantify the bullwhip effect

Get top management commitment for coordination
Devote resources to coordination
Focus on communication with other stages
Try to achieve coordination in the entire supply chain
network
Use technology to improve connectivity in the supply chain
Share the benefits of coordination equitably

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Any Question?

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Strategic Supply Chain

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